A series of posts about the misconceptions created by charity Web sites continues today.
Misconception No. 4: Low administrative costs are a good indicator of the quality of the organization
According to Money for Good, the amount spent on administration costs is the number one item that donors look for when deciding whether or not to give. The problems caused by the incessant need to keep overhead at a minimum are well laid out in the Stanford Social Innovation Review’s article “The Nonprofit Starvation Cycle.”
This misconception is probably the hardest one to break for two reasons. First, many charity rating systems use overhead costs as one of the primary factors in determining nonprofit scores.
I hope with the pending release of Charity Navigator 2.0, which uses indicators of effectiveness and results, more rating systems will decrease their emphasis on administration costs in determining nonprofit scores. Administrative costs are used because the Form 990, the informational tax form charities submit to the Internal Revenue Service, is the only paperwork that nonprofits are required to submit annually, thus it is the only standardized information available on charities.
Second, nonprofit groups actively reinforce the misconceptions when their Web sites tout their low administrative costs. Most have spending pie charts or administrative-expense percentages placed prominently on their home page. If charities want donors to stop putting so much emphasis on administrative costs, they need to stop using it as a marketing tool.
The misperception about the importance of administrative costs is another factor leading to the proliferation of new nonprofits and people flying to another country to help directly. Giving money or used clothing to your friend, neighbor, or church to fly to another country and hand out his or herself appears to be far more effective than donating to an established charity.
What message is your organization’s Web site giving donors?
Instead of focusing on low administrative costs, share information on the importance of those costs. Here’s a great quote from the joint statement issued last year by several charity watchdogs:
“While the idea of sending money ‘straight to the beneficiaries’ is tempting, nonprofit experts agree that judging charities by how much of their money goes to ‘programs’ is counterproductive. ‘Achieving a low overhead ratio drives many charities to behaviors that make them less effective and means more, not less, wasted dollars,’ says Paul Brest, President of the Hewlett Foundation, and co-author of Money Well Spent.”
Another good resource to share with donors is the Stanford Social Innovation Review article, “The Nonprofit Starvation Cycle.”
What sort of information does your organization share with supporters about its overhead costs? Share your approach in the comments space below.
3 Responses to Low Overhead Doesn’t Equal High-Quality Philanthropy
philippeboucher - January 27, 2011 at 1:21 pm
From my own experience I found a lot of opacity in big or not so big organizations that had received substantial grants to explain in detail how they were using the funds while it appeared less than 50% of the global amount awarded was invested in programs.
In that context one has to wonder where the money is going, especially if one can see a significant amount of travel and hospitality, that many organizations seem to take for granted, while the justification of the trips and far way meetings is far from obvious and never explained beyond “we met and there were x people present from x countries”: so what?.
There is also the question of the managers compensation.
A touchy question for the ones who are making more than one would expect in not for profit organizations without really demonstrating a stellar performance that could eventually justify the amounts paid.
The concern should be about transparency: tell what the administrative costs are and what they represent.
If you are efficient why would you hide them?
If you keep them secret, one has reasons to wonder.
From my perspective there is still a long way to go for most organizations to be transparent about how they manage their funds.
http://blogsofbainbridge.typepad.com/africa
bill__huddleston - January 27, 2011 at 5:10 pm
I’m quite willing to put travel expenses in a different category, but I think for the 21st century, the distinction between “program” and “administrative” is meaningless.
Do you really want to carry out your non-profit’s function with no lights, no chairs, no phones and no e-mail, much less a computer for all types of tasks? I still have my mother’s typewriter in the basement, and I’ll will give it to any non-profit that wants to go back to using carbon paper and white-out for their written communication. (BTW, it’s a manual Underwood).
Here’s a more detailed examination of the true consequences of the ridiculous emphasis on “How” instead of on “What and Why” that the non-profit world likes to emphasize:
The non-profit sector has done a spectacularly lousy job of explaining what it does and how it does it, and has spent fifty years convincing the American public that “administrative expenses” are bad and that “program costs” are good and now complains about how hard it is to get unrestricted funds.
Let me elaborate on this point, because I do think it is “chicken and egg question” – which came first, did the donors request to know the percentage of administrative costs, or did the non-profit in an attempt to compete for funds, say “Our administrative costs are lower than the other guy’s.” What a dumb thing to say. Only in the non-profit world do we push the “how” of a service or good as the means of convincing donors or grant-making organizations to fund us.
Think about it for a minute, when you go to get your car repaired, you presumably go through these steps:
1. You take it to a garage or dealer that you either have direct experience with, or was recommended by a friend, or you looked it up on the web.
2. You describe the problem with the car (your need).
3. Their mechanic diagnoses it, and calls you back with the recommended solution and estimated cost.
At this point you make your decision, and there are only 3 possible choices:
1. You have them fix it.
2. You decide their price is too high and you might be able to get it fixed somewhere else cheaper.
3. You decide that the problem is not as critical as you thought and you can live with it for some amount of time, whether the ultimate solution is to get a new car, or to have it fixed later.
Notice, nowhere in this decision process did you ask these questions:
1. How much are you paying your mechanics?
(I only want the cheapest mechanics possible to work on my car.)
2. What brand of tools and diagnostic equipment are you using?
(I don’t want to pay for the use of modern tools and computer equipment, my grandfather was a mechanic and he didn’t need any new-fangled gear to fix cars).
You can substitute almost any service or good you want and you can have a similar sequence: Dentist – I only want the old drills used (you know the slow, loud, painful ones from your childhood). Coffee server: What brand of coffee roaster/maker are you using, I’m only going to pay for one that’s cheap.
What the non-profit sector does not do well, is to make the case as the difference between “What & Why” versus “How.” “What & Why” should matter a lot to the potential donor, that is why you are talking to them, and why they are considering giving you some of their money. Your mission resonates with them in some way, whether because they or a family member or someone they know has had direct experience with your organization, or they just have heard about you and care about what your organization does.
The things that truly matter to donors are “What does your organization do?” and “Why do you do it?” If you answer those two questions, and you can certainly say, “Ten dollars a month helps us do ________ for the _________ in our community, or overseas, or in ________ this part of the country.
In a rush to compete against other non-profits, many non-profits then also answer the “How question” – even if it hasn’t been asked. What’s said is “We keep our overhead costs low so more of your money goes to program.”
What’s not said is this, even if it is true:
“Keeping our “overhead low” means that we pay our staff a barely living wage, and have 30% turnover because as soon as someone has any outside needs (home, family, etc.) they can’t afford to stay here.” The fact that 30% turnover keeps the program from ever being as successful as it might be, is never mentioned.
In the 21st century, the distinction between “overhead” and “program” costs is meaningless. Ask the potential donor or funder if they use the telephone, e-mail and the computer in order to do their job, and if they work in an office do they sit on a chair and work at a desk, because given the emphasis on “low overhead” all those things are bad. Then ask them to keep track for 3 days of how they spend their time: are they using the phone and computer for personal, work, or civic functions, and that they need to submit the detailed timesheet with this to their supervisor.
The fact that in our modern society we still use accounting methods that were developed 7000 years ago to count crops and cattle is a subject for a different article, but it’s worth mentioning. All marketing experts will tell you that your customers (donors) can be educated as to what’s important and why they should choose you and your product or service. Just because it’s for a non-profit and the direct benefit to the donor is harder to describe, it doesn’t mean that it’s not real.
The non-profit sector although it likes to although it likes to talk about the importance of collaboration, is often very close minded when it comes to fundraising. It views the world has having a “money pie” of a set size (charitable giving) and competes mainly against other non-profits for a slice of that pie. My experience is that it is possible to “grow the pie” by working in colloboration with other non-profits, and that the real competition for the donor’s dollar is not between two different non-profits, but it’s competing for attention among other discretionary spending, including sports, cable TV, $4 coffees, $200 shirts, toys, etc.
A lot of the problems that the sector faces, and believe me, I know that this is a particularly tough economic time, would be helped if this attitude and direction were encouraged: “Give While You Live and Give Without Strings.” If you don’t trust our organization to do what we’ve been doing, and have been successful at, that’s fine – choose some other organization, but if our mission does resonate with you, don’t hamstring us, we appreciate your unrestricted gift and you are making a difference by helping us meet our mission.
Regards,
Bill Huddleston
http://www.cfcfundraising.com
tmcothran - February 1, 2011 at 12:00 pm
Thanks for the great post! This prompted a post on my organizations blog about our administrative costs. Doing my part to cultivate informed donors! http://godsspiritinaction.org/value-of-overhead/